US elections is never a trivial event, let alone now that the world is still in the aftermath of the pandemic and not to mention two wars going on. Back in 2016, growth was benign, government debt still under some control, inflation low and geopolitics were not on our daily agenda. Eight years later all these have changed to the worse. It is, of course, fortunate that economic growth has held up well, but this is primarily due to balooning government spending and consumers maxing-out their credit cards on services, after having previously spreed heavily on goods. But both these growth tailwinds seem to be waning as we enter 2025.
US equities will probably initially cheer another Trump presidency. Being a businessman himself, Mr. Trump is in favor of low taxes, as little as possible regulation and "America First", all of which bode well for equities in the short-term. But Mr. Trump has also promised to impose large tariffs on everything imported, kick out illegal immigrants and lower taxes even more. All of these are potentially inflationary on its each own, but just imagine the outcome on consumer prices if they are all enacted at the same time. Mr. Trump is also not exactly in favor of the FED's independence, which would probably have to increase interest rates in the above case. On the positive side, Mr. Trump puts a huge emphasis on the well-being of the stock market, so any market revolt will probably make him change his mind and policies rather quick. But this would have to be a big revolt (ie correction).
On the other hand, we still do not know Mrs. Harris' economic agenda and her priorities, and markets could initially sell off. Of course, she is being described as the "status quo" by her voters, and that she will continue a rather successful Biden administration, which brought down inflation and saved growth from collapsing, not to mention taking the S&P500 to a record high. However, having the DNA of an Attorney General and a Democrat speak for higher regulation, government controls and higher taxes. Her "communist" past, from which she has tried to distance herself after she was nominated to run for President, could still haunt markets. Her recent proposals of government-imposed price controls on food and oil made her opponents compare her to Stalin, Guevara or Maduro. As for her selected running mate , Mr. Walz, she is often being reminded that he is a person who has travelled extensively to (communist) China and doing business there.
The issue is that regardless of who wins, the US government is already running large and unsustainable deficits. Mr. Trump might be very willing to slash taxes (ie lower revenues for the goverment) and Mrs. Harris to offer subsidies to first-time home buyers as recently promised, but they do not really have a lot of maneuvering space when it comes to fiscal policy. Creditors of the US government or in other words holders of US Treasury bonds would be keen to reduce their exposure, sending interest rates much higher and actually making the situation even worse, as this increases the interest expense of an already highly indebted government. Not to mention Mr. Trump's proposed tariffs which are , as we said, inflationary and gives one more reason for bond holders or speculators to sell.
We did get a sneak preview last week, when the new Labor government in the UK presented its first budget. Despite the various tax increases announced, the budgeted spending and hence the need for borrowing was much higher than expected and UK yields shot up 30bp in a matter of minutes. The UK 10-year is now up almost a full percentage point higher compared to early September. The sell-off soon spilled into Eurozone and US bonds, in anticipation of the elections. The German 10-year bond yield is now only 50-55bp lower than the peak of this cycle (2.95%) and despite the fact that the ECB has already cut two times and more is expected. Volatility will remain high in the following weeks as the new President will start hinting about the economic agenda and investors will also be receiving data on the economy and actions (or not) by the central banks.
Speaking of central banks, the FED meeting on Wednesday could not have been at a more perfect timing for those who like dramas. Just one day after the elections and without being sure if we will know the final outcome, the FED ise expected to cut rates again. With bond yields having risen significantly in the last two three weeks, the previous rate cut is essentially "neutralized" by the already tighter financial conditions. The same holds true of course for EUR yields and the ECB. As market yields rise, the real cost to companies and consumers also rise and thus the impact of central bank rate cuts on the economies is reduced. This means that central banks will soon have to perhaps accelerate the pace of rate cuts, rendering current levels of bond yields very attractive to buy, especially in the top quality / top rating category.
Eurozone October headline inflation rose to 2% y/y, above expectations of 1.9%. At the component level, as expected, higher energy inflation driven by a combination of higher fuel prices and base effects, was the key driver behind the increase. However, we have to note the higher-than-expected 0.5% increase in food inflation to 2.9% y/y which also contributed to the increase in headline inflation. Core inflation stayed unchanged at 2.7% y/y compared to the expected fall to 2.6%. On the positive side, within core, services inflation was stable at 3.9% y/y.
The US labor market showed new signs of weakness in October after the robust September numbers. The non-farm payrolls slumped to just 12k vs expectations for 105k and the previous two months were revised down (as usual) by more than 100k. The October very low number was definitely impacted by hurricanes and strikes, as the other government survey which calculates the unemployment rate found that it has not moved up but stayed at 4.1%. These figures combined with October jobs openings falling to the lowest level in three years further confirm that the US labor market is weakening, but still not at an alarming rate. But it gives the FED the freedom to continue its rate cuts for now.
Equities were volatile and finally registered a negative week. Both US and European major indices fell by 1% to 1.5%, taken down by Tech and consumer names in both regions. The mega-cap Tech results were uninspiring, with Alphabet ( Google) and Amazon the only bright spots. Meta (Facebook) and Microsoft sold-off as investors started to get nervous about their explosive spending on AI, which is poised to continue in 2025 with no immediate returns and Apple's growth was lackluster. The fact that Warren Buffet has kept selling shares of the company and just announced that Berkshire has now sold the 2/3s of the original stake have not helped sentiment. Next stop for Techs's fortunes is Nvidia's results, out in about two weeks.
Chart of the Week : Equities finished October with a negative sign (save for Japan).
October lived up to its expectations to be a volatile month. Despite S&P hitting a new record high, the rising yields, the upcoming elections and the Tech results finally caused selling pressures. Europe was the worst performer in this period with a 3.5% drop and Nasdaq managed to outperform, until the last days of the month when the selling occured. If the last week of the month evolves as a "new trend", then the market seems to be rotating into small caps (which were positive for the week) and other laggards (Dow Jones index also positive for the week, in an overall negative environment). But recent history has shown that the market keeps changing its mind of where it is best to be positioned and no reliable forecast on any rotation can be made, hence we would avoit it. As always, having diversified portfolios is the best medicine for volatility and wild rotations.
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• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
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• Sources: Chart of the Week :KSH, FactSet , Photo:
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